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Tuesday, September 30, 2008

It is well publicized that the financial industry is undergoing cataclysmic changes in terms of survival of companies, industry leadership, etc. Is there is another industry that is undergoing a similar transformation?

iSuppli, the market research firm, thinks so. They recently released a report indicating that major changes have been taking place in the semiconductor industry. Granted that the changes have been quieter and less dramatic.

Margins decrease --

They begin by saying that over time semiconductor industry profitably has shrunk. They point to a downtrend in margins and provide the following graph:

The surprising quote from the article, written byDerek Lidow, president and chief executive officer of iSuppli, is as follows:

"The semiconductor industry now is less profitable as a percentage of revenue than the notoriously low-margin PC business... the long-term trend indicates that the semiconductor industry—which historically has been good at capturing profits in the electronics value chain—seems to have lost its money-making touch."

An industry transformed --

The report goes on to describe how, in the view of iSuppli, the semiconductor industry has changed. Previously, there were three categories of companies: the dominant companies whose growth outperformed the market, the middle tier consisting of most suppliers and the lower tier of low performers.

Now, according to iSuppli, we see the result of years of predatory take-overs to secure market share combined with failures of the weakest players. What is left is essentially a two tier system consisting of a group of top-performers and another group that includes pretty much everybody else. The result of the changes in the industry, as Mr. Lidow of iSuppli describes them, can be quantified as follows:

"The number of competitors achieving growth of more than 100 percent during the period of 2004 to 2007 declined to nine, down from 19 during the period of 2001 to 2004. This shows semiconductor companies can no longer break out of the pack by taking market share away from weaker rivals."

Their take is that n0w that the industry has been transformed, one of the favored ways of attaining dominance, via buying market share, is not working anymore.

The game changes --

One way to attain greater than market growth rates is to design more highly integrated chips comprising expanded functionality in system-level chips built around proprietary Intellectual Property (IP). iSuppli points to Qualcomm (QCOM), MediaTek Inc. and Linear Technology (LLTC) as companies that have successfully pursued this approach.

Another strategy is to milk established cash-cow products in the industry. Companies pursuing this approach include Microchip (MCHP), Diodes Inc. (DIOD), Microsemi (MSCC) and Rohm.

A third strategy, whose use is limited to the dominant players, is to out-spend competitors in product development and in developing manufacturing efficiency and scale. Companies who have used this approach include Samsung, Intel (INTC) and Taiwan Semiconductor Manufacturing (TSM).

With semiconductors increasingly becoming a commodity, iSuppli believes that it will soon begin to make sense for growing firms to pursue a strategy of continuous acquisitions to build a companies with great depth, large portfolios of products and the scale to deliver top quality technology with best in breed sales and marketing.

Conclusion --

iSuppli seems to be saying that the semiconductor industry is consolidating, profit margins are shrinking and there is no turning back. I'm not sure I totally agree with this analysis.

With the advent of the fab-less semiconductor company, it is easier than ever for small players to enter the industry. The history of the hi-tech industry has many examples of small companies developing unexpected, disruptive products that changed the balance of power in the industry. Granted it is harder than it used to be but I don't think that tradition is dead yet.

Monday, September 29, 2008

The ProShares UltraShort Financial ETF (SKF) had a big day today as the market plunged. The ETF didn't do a bad job of tracking the double inverse of its underlying index, the Dow Jones U.S. Financials Index.

It is appropriate to contrast the performance of SKF with the performance of IYF, the iShares Financial ETF which also uses the DJ Financials index as its underlying. Today IYF fell more than 9% and SKF gained less than 19%. The two ETFs seemed to track each other pretty well.

Short selling ban having an effect?

As you may know, when the SEC instituted the ban on short sales of financial stocks on September 18, ProShares made a decision to stop creating new shares of SKF. The company explained it on their web site as follows:

"...we thought there was the potential for extraordinary demand to create new shares of these ETFs. We were concerned there might be limitations in getting sufficient short investment exposure to cover any new shares of SKF or SEF. So we decided it would be in the best interests of the ETFs to cease creation of new shares."

Thus far, ProShares has not announced any change in this policy.

With the number of shares outstanding now essentially fixed, ProShares offered the following warning:

"ProShares cannot predict whether shares will trade above, below or at their NAV. It is possible that because no new shares are currently being created, there could be a supply and demand imbalance in the secondary market for SKF and SEF shares, which may cause those ETFs to trade at a premium or discount to their indicative values..."

It is clear that they were correct in this assumption. The following chart (courtesy of ProShares) shows the distribution of times when SKF traded at a premium or discount to its Net Asset Value (NAV) in the April to June timeframe. It shows the premium/discount to be tightly clustered around the NAV, ranging between +1% to -1%.

Now look at the chart for July to the present:

This chart shows premiums as high as 6% and discounts as low as 4%. The general distribution is still mostly clustered around the NAV but now the range has doubled from +2% to -2% and tends toward a slight discount.

What does this mean for investors?

Large temporary premiums and discounts make investing in SKF more treacherous. These differences from NAV may be manifested as wider bid/ask spreads. They may also lead to higher volatility.

On the other hand, though no new shares are being created, SKF does seem to be tracking better these days than it did immediately after the short selling ban was announced. Back then there was one day when trading was halted and afterward it seemed as if the ETF wasn't even coming close to tracking the double inverse of its underlying index.

Things seem a lot better now. If you want to bet against the financials, SKF seems to have returned pretty nearly to its old form.

PS: Interestingly, according to the Dow Jones site, the index itself fell 14%. Neither ETF seemed to track the index as well as it should have. If anyone has an idea as to why that is, please leave a comment.

Saturday, September 27, 2008

This has been yet another week of wild action in the markets. This week's financial victim was Washington Mutual. It's getting so that we don't even flinch any more when titans of the industry collapse. Congress also did its part to keep investors on edge, managing to disagree amongst themselves as well as with the administration.

Markets attempted to rally in the latter part of the week as it seemed that the dissolution of WaMu was handled in an orderly manner and the politicians began to seek points of consensus. Still, it was too little too late with all the major averages declining significantly: a 2.2% loss on the Dow, a 3.3% loss on the S&P 500 and big 6.5% declines on both the S&P Midcap 400 and the Russell 2000.

With respect to fundamentals, there were terrible numbers related to home sales, durable goods and jobless claims. Even as it looks like the bank bailout may allow us to dodge a bullet in the credit markets, it appears that a weakening economy may indeed be tipping us into recession.

Each week our Alert HQ process scans over 7200 stocks and ETFs and records their technical characteristics. The following chart based on daily data summarizes the state of our technical indicators:

Moving Average Analysis --

Despite the rallies on Thursday and Friday, the markets had fallen so much in the first three days of the week that stocks were unable to pull their moving averages up. The number of stocks above their 20-day moving average and the number of stocks above their 50-day moving average both declined. More ominously, the number of stocks whose 20-day moving average is above their 50-day moving average declined again for the fourth week in a row.

Trend Analysis and Buying Pressure --

As for the trend indicators, we get a split decision this week. We use Aroon analysis to generate our trending statistics. This week actually saw a decrease in the number of stocks in strong down-trends but unfortunately the number of stocks exhibiting strong up-trends fell yet again and is now under 1000.

We use Chaikin Money Flow to track buying and selling pressure. This week's downturn in this indicator more than erased last week's nice uptick in the number of stocks exhibiting strong buying pressure.

I don't always display the chart that is based on weekly data. The curves are typically slow moving and don't show much. After the last few weeks, however, we are starting to get some real action on the chart.

As you can see in the chart below, the numbers of stocks above their 20-week and 50-week moving averages have fallen noticeably. The number of stocks in strong down-trends according to Aroon analysis has continued to rise steeply. And the number of stocks whose their 20-week moving average is above their 50-week moving average continues to trend downward.

Another chart that I don't always show is the following S&P 500 sector analysis. There is often little change from week to week. This time, however, there is clear weakening in most sectors. Exceptions are Financials and Consumer Staples. Consumer Discretionary has been stubbornly showing strength but this week we can see a marked deterioration in the DMI and Aroon trend analysis for this sector. Tech, Telecom, Industrials and Energy are noticeably down.

Conclusion --

With a bank bailout imminent and a ban on short-selling in place, we can probably expect to see further strength in financial stocks. What about the rest of the market?

The economic environment continues to be murky and credit markets are still tight. This is despite the fact that some kind of bailout has been a certainty since the idea was first announced. A relief rally would be expected when the bailout bill is signed into law. But can the rally hold? Investors will soon have turn their attention to the fundamentals of this market and it is not clear that those fundamentals support higher stock prices.

This post is to announce that the latest list of free stock alerts is up and available at Alert HQ. Each week we scan over 7200 stocks and ETFs looking for fresh BUY and SELL signals. We apply a combination of proprietary and standard technical analysis techniques to identify those stocks that are beginning to move. Our goal is to identify those stocks undergoing reversals, either to the upside or to the downside.

Well, Congress didn't get the bailout plan passed but the president assures us it will pass eventually. Another "mission accomplished"? We shall see. In any case, the uncertainty surrounding the bailout, compounded by terrible numbers related to home sales, durable goods and jobless claims served to push the markets down again. Losses on the week for the major averages ranged from 2.2% on the Dow to a whopping 6.5% on both the S&P Midcap 400 and Russell 2000.

Damage to our Alert HQ technical indicators continues. Against this backdrop, we see SELL signals outnumbering BUY signals again. Here is the breakdown for this week:

based on daily data, we have 20 BUY signals and 36 SELL signals

based on weekly data, we 16 BUY signals and 41 SELL signals

On the BUY list we see a few more banks along with a Biotech ETF and a gold miner.

On the SELL list we see a mixture of industrial, tech and retail companies and a bullish U.S. dollar ETF among many others.

Stop by Alert HQ and download your free lists. The lists based on weekly data show those stocks that have exhibited some good follow-through after a recent trend reversal. If you want to be early in identifying the newest trend reversals, the lists based on daily data are for you. No matter which preference you have, there are bound to be a few stocks you will want to add to your watch list.

Wednesday, September 24, 2008

There were two interesting news items about Yahoo! today and I thought I'd pass them on and provide my opinion.

Talks with Time Warner?

The Yahoo! board has reportedly approved moving forward with talks with Time Warner (TWX) to buy AOL.

This is certainly good for Time Warner. AOL is a premier web property but, much like Yahoo!, its potential seems to remain unfulfilled. It is unlikely Time Warner can unload the Internet access business on Yahoo! so that millstone will remain around CEO Jeff Bewkes neck for the time being.

The more interesting question is whether Time Warner would be willing to sell Platform-A, their online advertising network. This is also unlikely as that division is one of the largest ad networks on the web and is profitable as well.

My fear is that the new board will drive Yahoo! into a bad deal. AOL is a virtual duplicate of Yahoo! only, in my opinion, not quite as good and not quite as deep in terms of what it offers. What possible benefit would Yahoo! derive from adding AOL to its properties? It would just be a huge distraction when management needs to focus on the properties it already owns.

Is Carl Icahn a one trick pony whose only tactic is to engineer mergers and acquisitions? If this is what's being pushed on Yahoo! by the new board members then we can expect to see the stock in single digits soon. Keep a close eye as this will provide a wonderful shorting opportunity (as long as Yahoo! isn't on the SEC's do-not-short list yet).

New Ad Platform --

Today was also the debut of APT, Yahoo!'s new ad platform.

Yahoo! is taking some cues from Google's wide-open advertising products. Much like AdWords, APT provides online tools for advertisers to control campaigns, measure results, etc. Much like AdSense, it provides a way for publishers to easily monetize their inventory of ad slots.

APT, however, is more oriented toward banner ads. This has traditionally been Yahoo!'s strength whereas search ads have traditionally been Google's strength.

In the Google world, it's all about keywords. Advertisers bid on keywords and, if their bid is high enough, their ads are shown on web pages or search result pages where those keywords are displayed.

APT works the other way around. APT can show an advertiser available inventory and provide anonymous data on visitors to the pages, including behavioral and geographic information. This allows advertisers to more accurately target the most likely customers. The promise of more highly targeted ads is higher rates for publishers and, as the owner of the platform, Yahoo!

As an added bonus, there are features to support cross-selling and rate card tools.

Yahoo! also indicates that they will make their APIs available so other software developers can build new functionality around the platform. Custom reporting is an application that comes immediately to mind.

What Yahoo! is doing is attempting to define the next generation ad platform by extending the capabilities we have seen in some of the other big platforms maintained by companies like DoubleClick (now owned by Google), ValueClick or Tribal Fusion. Putting all the tools online combined with data on the characteristics of the traffic for specific web pages is actually a pretty powerful concept.

Yahoo! is opening APT initially to newspaper publishers the San Francisco Chronicle and San Jose Mercury News. It is expected APT will bring on other partners, advertisers, agencies, and ad networks in a phased roll out. Eventually it will be expanded to include search and mobile ads.

Yahoo! tried to jumpstart their advertising momentum by developing Panama which was supposed to make their search advertising competitive with Google. We know that didn't pan out. There is a risk APT won't pan out either but it's a good idea and I wish them luck with it.

Tuesday, September 23, 2008

I recently wrote a post ("Who benefits from new short selling rules?") discussing the impact of the new rules that ban "naked" shorting. My position was that this would probably increase the trading volume in the ProShares ultra short ETFs.

Since then we have seen the imposition of yet another rule. In an attempt to protect financial stocks, the SEC has prohibited short sales of shares of certain financial companies. The list of protected financial companies has now expanded to over 900.

While many of the ProShares ultra short ETFs continued to trade in a manner that is decently tracking the action in the underlying index they are shorting, the Ultra Short Financial ETF (SKF) ran into huge problems.

After getting hammered on Thursday and Friday of last week, SKF barely opened on Monday. It was almost noon before it started trading in earnest. Remember, Monday was the day when the well-known Financial Select Sector SPDR ETF (XLF) fell over 8%. SKF should have jumped 16%. By the end of the day, though, SKF hadn't come anywhere near that gain.

What was going on? Did the shorting ban affect SKF?

ProShares does not actually short the market. Instead, they use multiple financial instruments, in an attempt to mimic the inverse performance of the underlying index. Per the prospectus, those instruments are:

Futures contracts and options on futures contracts

Swap agreements

Forward contracts

Options on securities and stock indexes and investments covering such positions

OK, that means they shouldn't be impacted by the shorting ban, right? Not so fast.

ProShares announced on Monday that "Short Financials ProShares (SEF) and UltraShort Financials ProShares (SKF) are not expected to accept orders from Authorized Participants to create shares until further notice". In other words, shares would not be created for those who wished to buy the ETF.

The problem seems to have been hidden a layer deeper than the ProShares ETF itself. As stated above, ProShares enters into swap agreements. This means we need to consider the actions of the counterparties to those swaps. With the government instituting a ban on shorting financials, what happens when the counterparties suddenly find themselves unable to short the market? Everything grinds to a halt.

That's what we saw on Monday. It seems that by Tuesday, they have sorted things out. There are numerous ways to institute a short position without actually breaking the no-shorting rule. It appears that ProShares may have shifted the mix of financial instruments they are using. It is also likely that their swap counterparties have also moved to what can be called "synthetic shorting" using a mix of options, for example. In any case, SKF did deliver about twice the inverse of the performance of XLF.

As one of the articles mentioned below says, the government's unpredictable actions are the ultimate counterparty risk. In the meantime, SKF seems to be soldiering on. Given the unfavorable reception the Paulson plan received in Congress today, SKF will hopefully continue to do its job delivering solid upside as the financial sector weakens again.

Related articles:

I highly recommend the following excellent articles if you wish to go into further detail:

Monday, September 22, 2008

The men who hold high places must be the ones to start, to mold a new reality, closer to the heart. - Rush, Closer To The Heart

And so Reality now sets in...

Markets rallied last week on the announcement the Treasury and the Fed had developed a plan address the problems at U.S. financial institutions.

Now, the reality of how things are done in Washington takes over and the momentum is bound to slow. If there was complete agreement on the Paulson plan, perhaps we could be hopeful for a quick adoption of the legislation required to put it into law. As we see below, there may be agreement on the broad necessity of doing something but there is anything but agreement on the details.

We will look at the major groups of protagonists and list the issues that will be points of contention. By our count there are 16 issues that will have to be resolved before the plan becomes law.

The legislators --

The Wall Street Journal reports that legislators are working to put their own stamps on the rescue bill, probably complicating the process of it being passed this week. Following are seven examples of the WSJ is talking about:

1. Democrats are pressing for oversight through the Government Accountability Office. Even some Republicans are expressing concerns about writing essentially a blank check to the Bush administration. These proposals attempt to address concerns that the plan would be an unconstitutional delegation of congressional spending power. "We totally understand the gravity of the moment ... but you cannot just turn over $700 billion of taxpayer money and not insist that the taxpayer is going to be protected," Senate Banking Committee Chairman Christopher Dodd told reporters.

2. Democrats are questioning the legality of an important provision in the Bush administration's financial rescue plan: a proposal to bar judicial scrutiny of the U.S. Treasury Department's acquisition of up to $700 billion in troubled assets.

3. Since the bill was sent up to Capitol Hill as the weekend began, members of Congress have asked that individual mortgages be propped up under the legislation.

4. Democratic demands to broaden the rescue plan also include a stimulus package for the economy.

6. Some conservatives are balking at the plan as well. Sen. Jim DeMint (R-S.C.), a member of the Joint Economic Committee, told the Los Angeles Times: "What is missing from it and from the recent string of bailouts is a commitment to return to a free enterprise economy. ... What we need now is not what could be nearly a trillion dollars in new taxpayer bailouts but pro-growth policies that allow our markets to correct and start growing again."

7. On the other side of the coin, Dodd and New York Sen. Charles Schumer, a member of the Senate Democratic leadership, both said having the government receive warrants to buy equity in companies selling off assets could protect taxpayers.

The administration --

The administration has also taken some actions to complicate the proceedings. The following three items will not make it any easier to get the bill through Congress:

8. Bloomberg reports that a plan to include purchases of instruments such as car loans, credit-card debt and other devalued assets to the rescue may force an increase in the size of the package as the legislation proceeds through Congress. Treasury officials propose buying what they term "troubled assets", without specifying the type. The administration's plan would even let the Treasury acquire assets from non-financial firms if needed to promote market stability.

9. The New York Times says that Paulson has requested that foreign banks with US operations be included. Some Democrats oppose have U.S. taxpayers bail out foreign firms.

10. The Treasury department adjusted its plan to insure money-market funds to limit protection to balances as of Sept. 19, after complaints from bank lobbyists.

The lobbyists --

It seems that there is no shortage of companies trying to line up at the feeding trough and so we have their proxies in Washington, the lobbyists. We have a few items from them too:

11. The Wall Street Journal reports that many financial companies are lobbying to be included in the government's $700 billion bailout. That will be a siren call for populist Democrats to define restrictions or guidelines.

12. Lobbyists are vehemently opposing the Democrats suggestion of mortgage reductions for homeowners facing foreclosure or bankruptcy as are some conservative Republicans.

13. The NY Times reports that small banks are pushing the government to buy loans they made to home builders and commercial developers.

14. Wall Street banks are lobbying to temporarily suspend certain accounting rules to avoid taking big losses on the assets they sell to Treasury, which would weaken them further.

15. Investment firms are jockeying to oversee all the assets that Treasury plans to take off the books of financial institutions, a role that could earn them hundreds of millions of dollars a year in fees.

16. Some bankers are pushing for government support of municipal securities as part of a broader effort to restore investor confidence in money market funds.

In conclusion --

To drive this plan through an unruly Congress with any kind of expeditiousness will take strong leadership from the top. Who do we have in the bully pulpit today? The most unpopular president in history and a lame duck, to boot.

With the economy a top issue in a presidential election that is less than six weeks away, Congress wants to show it can take action but will be unable to resist the temptation of using the debate for making political hay while the sun shines.

So we have the administration, the Democrats, the bankers and the lobbyists all trying to expand the scope of the bailout.

As Democrats and Republicans voice their opinions and push their favorite agendas, the plan will go through multiple versions, debate, vitriol and disagreement. All the while, the clock will be ticking.

Investors should hunker down and prepare to watch the drama unfold in Washington. If you can't afford a ticket to the movies, at least the ensuing political show will be free entertainment.

Sources: thanks to Bloomberg, the Wall Street Journal and the New York Times for information and various quotes.

Sunday, September 21, 2008

Wow, what a week we have just been through! It looked like the wheels were really coming off before the government rode in to the rescue and the markets turned on a dime.

Barrels of ink and gigabytes of pixels have been expended writing about Lehman declaring bankruptcy, Merrill selling itself, the near demise of AIG, the announcement of a systemic bailout plan and the other events of the week so I won't repeat them here in any detail. Suffice to say, all the major averages save the Dow Industrials managed to end the week higher. Mid-caps notched a 2.1% gain over the prior week and small-caps zoomed up 4.6%.

I will limit myself to presenting a few of the market statistics that we track. Each week our Alert HQ process scans over 7200 stocks and ETFs and records their technical characteristics. The following chart based on daily data summarizes the state of our technical indicators:

Moving Average Analysis --

Despite the strong rallies on Thursday and Friday, our indicators continue to paint a dismal picture of the market. Though we had a modest increase in the number of stocks that are above their 20-day moving average we only had a very small increase in the number of stocks that are above their 50-day moving average. As a sign of the market's overall health, I like to track the number of stocks whose 20-day MA is above their 50-day MA. That indicator continued its downward path again to make it three weeks in a row of declining values.

Trend Analysis and Buying Pressure --

As for the trend indicators, there has been no respite. We use Aroon analysis to generate our trending statistics. This week saw another increase in the number of stocks in strong down-trends and another decrease in the number of stocks in strong up-trends.

We use Chaikin Money Flow to track buying and selling pressure. This week we saw a nice uptick in the number of stocks exhibiting strong buying pressure.

S&P 500 Sector Analysis --

Below we present our sector analysis for the S&P 500. We have looked at three characteristics:

Percentage of stocks in a sector whose Aroon analysis indicates they are in an UP trend

Percentage of stocks in a sector whose DMI analysis indicates they are in an UP trend

Percentage of stocks in a sector that are trading with their 20-day moving average above their 50-day moving average.

When all was said and done, this week's volatility didn't drastically change the picture in our sector analysis from how it has looked for the past few weeks. We do see a slight bullish stirring in Energy. Consumer staples continues its leadership. Financials certainly perked up and Technology showed some improvement.

In summary --

Stocks have definitely improved with the powerful rallies of Thursday and Friday. What is striking, though, is that it didn't make that much of an impact on our indicators. Two days of good gains have not been enough to significantly move the needle and it goes to show how beaten down stocks were prior to the rally.

Since our indicators use data averaged over time, it will take continued positive action in the markets before the indicators sound an "all clear". Indeed, the Dow, the S&P 500 and the NASDAQ are all still below their 50-day moving averages with the NAZ still below its 20-day MA. The 200-day MA is commonly thought of as an indicator of a bullish trend. Except for the Russell 2000, they all have quite a way to go before they attain that milestone.

In any case, the tone of the market is now hopeful rather than hopeless. If Congress and the Treasury can agree on a plan quickly it will go a long way toward restoring health to stocks. Still, this market is fragile and I wonder what prolonged debate will do to the currently positive sentiment among investors. I am not so sure this is going to be a V-shaped bottom.

Saturday, September 20, 2008

This post is to announce that the latest list of free stock alerts is up and available at Alert HQ. Each week we scan over 7200 stocks and ETFs looking for fresh BUY and SELL signals. We apply a combination of proprietary and standard technical analysis techniques to identify those stocks that are beginning to move.

Just when you think the market couldn't get any crazier, we have a week like this one! Panic, fear and loathing followed by euphoria. Blame the innocent, reward the incompetent. Shoot the short sellers! Bail out everyone!

Stocks were all over the place this week though they finished the week strongly. I had no idea what the Alert HQ software would make of the gyrations we have seen over the last two weeks. To my amazement, we have tons of BUY signals! The number of SELL signals, however, seems to be holding steady. And so, here is the breakdown for this week:

based on daily data, we have 41 BUY signals and 29 SELL signals

based on weekly data, we 59 BUY signals and 28 SELL signals

We have a good variety of companies in different industries listed this week but it is notable that we are now seeing some reversals occurring that are generating BUY signals among the financials.

Stop by Alert HQ and download your free lists. The lists based on weekly data show those stocks that have exhibited some good follow-through after a recent trend reversal. If you want to be early in identifying the newest trend reversals, the lists based on daily data are for you. No matter which preference you have, there are bound to be a few stocks you will want to add to your watch list.

Thursday, September 18, 2008

I have written two previous posts focused on being conservative in your 401K during these turbulent days in the stock market (read Part 1 or Part 2). The basic concept was that you should lighten up on stocks and allocate a larger percentage, as much as 50%, to a stable value fund. In this manner, you would be obtain somewhat higher interest rates than would be available from a money market fund or Treasury bond fund while preserving capital.

Now we have stories in the news about money market funds "breaking the buck" and it is causing many investors to wonder, not only about their money market funds, but also about how stable their stable value funds actually are. The concern is well-placed given that:

Fannie Mae and Freddie Mac bonds (known as agency debt) are often found in stable value funds

AIG is a major player in stable value funds and provides "wrap" contracts that protect against loss of principal for some 10% of all stable value fund assets across the industry.

We all know the government has essentially taken over all three entities, throwing stock markets worldwide into turmoil.

Thankfully, the government is still standing behind Fannie and Freddie's debt and that has been reassuring bond holders. So what about the AIG connection?

"In stable-value wrap contracts, the fund assets are not held in the insurance company's general account. They're owned and controlled by the plan. And in stable-value funds that hold AIG wraps, AIG would typically be just one of many wrap providers. "If something were to happen to one of those wrap providers, it doesn't really change anything in the stable-value portfolio other than the manager has to decide to reallocate those dollars to a different wrap provider," says Kelli Hueler, CEO of Hueler Analytics."

This is reassuring but it does not imply that stable value funds are immune to the current financial environment. Interest rates can be expected to decline as fund managers opt for less risk and less return. As the journal says:

So it appears that stable value funds dodged another bullet. With returns likely to decrease, however, there may be less advantage to holding these investments when compared to lower yielding but ultra-conservative government bond funds that are also generally offered in many 401K plans.

Certainly the investors in financial institutions will benefit from new rules to prevent naked short selling and other to-be-announced variations on the short selling theme. Essentially, their stocks will be protected from particularly aggressive short sellers.

Another beneficiary is likely to be ProShares. The company offers a selection of inverse ETFs that allow investors to short various market sectors (financials, tech, semiconductors, for example) or market styles (mid-cap value, small cap value, small cap growth, etc.) or indexes (the Dow, the S&P 500, the NASDAQ).

There are always investors who will want to short stocks, especially in an investment environment like we are experiencing these days. The ProShares ETFs may offer a simple way around the rules. And the potential increase in volume will serve to reduce the bid/ask spread, making trading these ETFs more efficient.

Wednesday, September 17, 2008

VMware (VMW) has been hammered lately as its CEO was replaced and the chief scientist walked out. The company was once the undisputed leader in server and desktop virtualization but competitors are making inroads.

We have seen the repeatedly delayed Microsoft Hyper-V virtualization product finally come to market. Several improvements are in the works to make it more robust for enterprise markets (adding the ability to move virtual machines with no downtime, for example) but the product is certainly usable right now. Its integration into Windows Server 2008 makes it a cheap and easy alternative for IT shops using the Microsoft platform.

We have seen Citrix purchase VMware rival Xen. Citrix is throwing its marketing and financial muscle behind Xen to establish the product as serious competition to VMware and the perfect complement to the standard Citrix presentation server implementation.

It is no surprise that IBM is also playing in VMware's sandbox. IBM is large enough that it tends to have some kind of product for nearly every IT segment so of course it has a virtualization product, too.

Server Virtualization versus Desktop Virtualization --

The first approach successfully commercialized was server virtualization. Server virtualization is a generalized term describing the ability to host multiple complete Operating System images such as Windows or Linux (including or excluding a kernel) on a single hardware platform. Server virtualization is often used to consolidate multiple smaller (or older) servers onto a single, large server, without changing how the applications or OS is managed. A software layer known as a hypervisor allows multiple operating systems to run on the same physical hardware.

Desktop Virtualization refers to a thin client architecture in which each user is assigned a virtual machine (OS and applications) in a virtualized server in the network. This means that a user's PC acts merely as a KVM (keyboard, video display, and mouse) over a network to a centrally hosted desktop.

IBM trying to play the disruptor --

The VMware and Microsoft solutions work fine but suffer from certain limitations: VMWare has more complicated storage requirements. Microsoft has less complicated storage and server requirements but more limited choices.

IBM is set to debut a technology at the VMWorld conference in Las Vegas that executives say reduces storage costs for virtual desktop storage by up to 80 percent.

The advantage over Microsoft and VMware: less storage required yielding less complexity, lower cost and faster deployments.

Conclusion --

IBM is so huge this development will not make a significant impact on the company's bottom line. For VMware, however, it is just one more challenge for the company to overcome at a time when the challenges seem to be multiplying daily. When your whole business is virtualization, these kinds of troubles can put a company like VMware on the defensive.

I hate to pile on VMware here at a time when the stock is already under pressure but the company is certainly running into tough times. VMware is not sitting on its hands; it is also making announcements at VMWorld. They are publicizing their concept of the virtual desktop infrastructure (VDI) that will allow users to access their data and applications from practically any device. Unfortunately, this functionality is still in the realm of vapor-ware and not expected to be available until sometime next year or later.

As an investment, VMware's days as a rocket stock are behind it. Despite a strong franchise, the company has many question marks around the impact of its growing competition. For now, investors should be taking a "show me" attitude toward the company.

Monday, September 15, 2008

Nearly lost in the din surrounding the failure of Lehman Bros and the take-over of Merrill Lynch was the industrial production and capacity utilization report.

The Federal Reserve released the numbers for August today. The results were below economists expectations and did nothing to help the tone of the market.

As I have been trying to focus my writing on the technology and Internet sectors, in my review of the Fed's report I'll provide a little overview and then concentrate on the results in high-tech.

What it is --

The index of Industrial Production is a fixed-weight measure of the physical output of the nation's factories, mines, and utilities. Manufacturing production, the largest component of the total, can be accurately predicted using total manufacturing hours worked from the employment report. 2002 is used as a reference and corresponds to 100%.

August results --

Industrial production decreased 1.1 percent in August and was revised down in June and July to show smaller gains of 0.2 percent and 0.1 percent respectively. After little movement over the previous three months, factory output was down 1.0 percent in August, in part because of a drop of 11.9 percent in the production of motor vehicles and parts. Excluding motor vehicles and parts, the index for manufacturing decreased 0.3 percent.

This next chart is from the Fed's web site and it provides an overview of most major sectors though tech is not included. Both industrial production and capacity utilization are displayed. The overall situation is that most of the charts are showing a distinct downward trend.

This next chart provides the detail on tech or "high-technology industries" as it is referred to by the Fed.

A reader needs to be careful with the top two charts in the high-technology grouping. Instead of providing the simple numbers for the sector these two charts compare total Industrial Production (in black) and Industrial Production excluding hi-tech (in red).

There are two takeaways:

Tech is not immune to the global economic downturn. The sector has been the beneficiary of export-driven growth most of this year but the last couple of months show a distinct slowing with August showing contraction.

The vertical gray bars on the charts identify periods of recession. When month-over-month growth in Industrial Production goes negative, it seems that recession eventually follows. We have that situation happening now. The close tracking between total Industrial Production and Industrial Production excluding high-tech indicates that tech is entering a downturn along with other industrial sectors and that the economy in general could be teetering on the brink of recession.

In summary --

Tech doesn't look much like a safe haven. Indeed, it appears that there are no safe havens. When growth in Industrial Production goes negative to a significant degree, the risk of recession increases strongly.

The Industrial Production numbers may not reflect the kind of disaster that is playing out in the financial sector; nevertheless, it appears that a real slowdown is underway. The ramifications could be unpleasant including loss of jobs and corresponding pressure on consumer spending as well as drooping GDP. We may not be in a recession yet but it seems like it's not much fun to be an investor these days.

Sunday, September 14, 2008

Are you wondering, as I am, why the markets rallied toward the end of last week?

The only conclusion to draw is that turmoil in the financials must be good for investors. Earlier in the week we had the takeover of Fannie Mae and Freddie Mac. Their stocks are so wasted they were dropped from the S&P 500. Then we had the accelerating slide in Lehman Bros. Heading into the weekend, the government is hosting meetings trying to find someone to buy the company, whole or in pieces. Take-overs, take-unders: I guess it's all bullish.

For those who actually pay attention to fundamentals, the news this past week was not particularly good. Retails sales were weak despite lower gas prices. Growth in Europe is projected to be lower which will help the buck appreciate and decrease the cost of goods imported into the U.S. (consumer gets a break, exporters take a hit). The Producer Price Index (PPI) came in hotter than expected as did core PPI. On the bright side, the University of Michigan Consumer Sentiment Index came in much better than expected.

Fundamentals and sentiment are, of course, what drives the market yet it is useful to review the technical situation. Each week our Alert HQ process scans over 7200 stocks and ETFs and records their technical characteristics. The following chart based on daily data summarizes the state of our technical indicators:

As can be seen on the chart above, the only line heading upward is the one that counts the number of stocks in strong down-trends as determined by Aroon analysis. Everything else is heading south: number of stocks above their 20-day moving average, above their 50-day moving average, number of stocks in strong up-trends according to Aroon and number of stocks exhibiting strong buying pressure as determined by Chaikin Money Flow.

Of note on the above chart is the path taken by the light blue curve describing the number of stocks whose 20-day moving average is above their 50-day moving average. The last time it reversed course and turned downward was back in early June. That was a prelude to the markets losing approximately 10% and falling to the July lows.

The chart below is based on weekly data. The same indicators are measured but here we get what looks like a sideways trending market.

S&P 500 Sector Analysis --

Below we present our sector analysis for the S&P 500. We have looked at three characteristics:

Percentage of stocks in a sector whose Aroon analysis indicates they are in an UP trend

Percentage of stocks in a sector whose DMI analysis indicates they are in an UP trend

Percentage of stocks in a sector that are trading with their 20-day moving average above their 50-day moving average.

What is notable this week is how decimated the Energy sector is. Industrials, Technology and Telecom are showing increased weakness. Consumer Discretionary is finally starting to pull back a bit.

Some things are notable by how much they didn't change. The Financial sector, despite all the crazy gyrations and strange news, is actually hanging in there pretty well compared to the past few weeks.

In Summary --

Our work with daily data shows a market in danger of rolling over and moving to new lows. The weekly data shows a market stuck in a range.

This coming week will be dominated by the Financial sector yet again. Investors will be reacting to the outcome of the Lehman drama. We also have on tap this week earnings from Goldman Sachs (GS), Morgan Stanley (MS).

There will also be a full slate of economic reports to digest: Industrial Production, Consumer Price Index (CPI), notes on the FOMC policy statement, building permits and housing starts, crude inventories, weekly initial claims and the NY Empire State and Philadelphia Fed regional manufacturing surveys.

To me it looks like a market where risk is increasing. I am not inclined to assume the bottom is in. All we can do is be alert, be careful and be conservative until the trend reveals itself.

Saturday, September 13, 2008

This post is to announce that the latest list of free stock alerts is up and available at Alert HQ. Each week we scan over 7200 stocks and ETFs looking for fresh BUY and SELL signals. We apply a combination of proprietary and standard technical analysis techniques to identify those stocks that are beginning to move.

It was a wild week with Fannie and Freddie being taken over, Lehman nearly going under, soft retail sales and jobs numbers being reported, falling oil prices, etc. The markets surged and plunged yet, when the dust settled, the major averages ended the week with small gains.

Against this backdrop, Alert HQ managed to find a good number of both BUY and SELL signals. We have 8 BUY signals and and 27 SELL signals based on daily data. There are also 32 BUY signals and 28 SELL signals based on weekly data.

Stop by Alert HQ and download your free lists. The lists based on weekly data show those stocks that have exhibited some good follow-through after a recent trend reversal. If you want to be early in identifying the newest trend reversals, the lists based on daily data are for you. No matter which preference you have, there are bound to be a few stocks you will want to add to your watch list.

Thursday, September 11, 2008

Today we have another list of links to posts by other bloggers that are writing about ProShares ETFs. As usual, this week's list is comprised of posts from Seeking Alpha. I recommend that you click through to the authors own sites after reading these posts on the Seeking Alpha site.

In order to go beyond what Seeking Alpha has to offer, I am also providing this link to the Google "Search Blogs" feature that will return any blog post that includes the symbol for one of the ProShares ETFs that was written in the last month. Bookmark this post and come back to use this link at any time. There may be some overlap with the content from Seeking Alpha.

Wednesday, September 10, 2008

If you were thinking it might be time to bottom-fish among the semiconductor equipment stocks, you might want to restrain that impulse.

SEMI (Semiconductor Equipment and Materials International, a global industry association) reported yesterday that worldwide semiconductor manufacturing equipment billings were $7.83 billion in the second quarter of 2008. That is 26 percent less than the first quarter of 2008 and 29 percent less than the same quarter a year ago.

Surprisingly, China and Taiwan saw the largest drops in percentage terms. Given how much semiconductor manufacturing has moved offshore to these two countries, it is a clear indication that demand for semiconductors is lagging the capacity available to produce them. If there is excess capacity, it is a sure bet that the semiconductor manufacturing equipment sector will remain in the doldrums for the foreseeable future.

Fab build-outs grinding to a halt?

I have written previously (read it here) on the trend of chip makers "going fabless". In this scenario, chip companies do the design work and outsource the manufacturing to semiconductor foundries or "fabs". One would think that if the trend is continuing, there would be some strength in semiconductor manufacturing equipment orders from some of the big players in the contract fab sector. It appears that is not happening.

In a further sign of stress, it appears the biggest contract foundries are slowing their expansion of 12-inch fabs. Taiwan Semiconductor Manufacturing (TMSC), the largest company in the sector, has slowed 12-inch fab expansion and has signaled a conservative outlook. Major TMSC competitor United Microelectronics Corporation (UMC) has really put on the brakes on their expansion plans. They have completed construction of a building to house another 12-inch fab but the building remains essentially empty. These two companies are not alone. It is assumed the companies are waiting for demand to pick up before investing in manufacturing equipment.

Stocks hitting new lows --

Given the situation described above, it is no surprise that the big semiconductor equipment manufacturers are seeing their stocks hit new lows. It is pretty much across the board. Despite the business flowing in from solar manufacturers, Applied Materials (AMAT) is close to a 52-week low. Lam Research (LRCX) is also close to a 52-week low while KLA-Tencor (KLAC) has already hit that dubious milestone.

Optimists are predicting a big pickup in demand in 2009. If that comes to fruition, perhaps we really are seeing the bottom here. Still, the prudent course seems to be to wait to see some solid evidence of a recovery in demand for both chips and the equipment to make them. Patience will be rewarded.

Tuesday, September 9, 2008

Last Friday, the stock jumped on news that Samsung might be interested in acquiring the company. Enthusiasm then began to wane when SanDisk's chief executive said the company did not need to be acquired.

Today, SanDisk suffered a downgrade when a Lazard analyst offered the following comment on the potential acquisition:

"...this move is highly unlikely and is aimed at putting pressure on SanDisk in its royalty negotiations."

He also thinks the NAND sector is doing worse than most analysts acknowledge.

Furthermore, word in the Taiwan memory industry indicates that SanDisk is approaching customers for possible sales of NAND flash in wafer or die form. This is unusual in that SanDisk typically sells finished chips and flash modules. The takeaway here is that SanDisk's inventory levels are unusually swollen and the company is trying to move product any way it can. Another way of putting it is that SanDisk's capacity is exceeding current demand.

I used to follow SanDisk closely and considered the NAND flash market to be much stronger than the DRAM market. Now it seems that the state of the NAND industry has spiraled down to the same low margin commodity status that has bedeviled DRAM producers for years. We have seen an influx of new producers over the last few years and a corresponding drop in prices per megabyte. In terms of the effect on SanDisk, not even leadership in intellectual property has been enough to maintain previous levels of profitability. Indeed, Lazard indicates that royalties are likely to be squeezed as well as margins.

SanDisk under $10 a share might be attractive but, for now, there is just too much bad news to consider the company a buy.

Sunday, September 7, 2008

For most of the week the bears were in control. Thursday saw rampant pessimism drive the Dow down 344 points. Earnings warnings from a couple of tech stocks, a dismal picture painted by the Fed Beige book, lackluster retail sales numbers and rumors of hedge funds in trouble all conspired to take the major averages back into bear market territory.

Friday started out looking like more of the same. The Non-Farm Payrolls report came out in the morning with a decline of 84,000 jobs. The unemployment rate spiked up to 6.1%. Predictably, markets sold off on the news. Mid-day, however, rumors that KKR and Blackstone were interested in buying pieces of Lehman started stocks moving upward. This was followed by talk of an impending federal government bail-out of Fannie Mae and Freddie Mac.

By the end of the day on Friday, stocks had more or less recouped the day's losses, led by a rally in bank stocks. The Dow and the S&P 500 managed to finish in the green while the NASDAQ ended with only a modest loss. Over the course of the weekend, details indeed emerged describing the the government's actions with regard to Fannie and Freddie and proving the rumors true.

The question mark in my mind: will news of the government "conservatorship" of Fannie and Freddie be enough to overcome the negative economic reports that seem to presage a weak close to 2008?

Fundamentals and sentiment are, of course, what drives the market yet it is useful to review the technical situation. Each week our Alert HQ process scans over 7200 stocks and ETFs and records their technical characteristics. The following chart based on daily data summarizes the state of our technical indicators:

Moving Average Analysis –

Whereas all the moving average indicators moved up in unison the previous week, this past week we see the opposite occurred. 1400 stocks dropped below their 20-day moving average and over 1000 dropped below their 50-day MA. Only one third of stocks we evaluated remain above their 20-day and 50-day moving averages.

Trending Analysis and Buying Pressure --

We use Aroon analysis to identify stocks exhibiting strong trends. over 1100 new stocks are now exhibiting strong down-trends according to Aroon but, unexpectedly, we see a small increase in the number of stocks exhibiting strong up-trends. For the first time in weeks, down-trends exceed up-trends.

Our Chaikin Money Flow analysis shows the number of stocks exhibiting strong buying pressure has been trending down for several weeks now and is at the lowest level we have seen in the last month and a half.

In the chart below based on weekly data, we see the same kinds of moves only somewhat more subdued.

S&P 500 Sector Analysis --

Below we present our sector analysis for the S&P 500. We have looked at three characteristics:

Percentage of stocks in a sector whose Aroon analysis indicates they are in an UP trend

Percentage of stocks in a sector whose DMI analysis indicates they are in an UP trend

Percentage of stocks in a sector that are trading with their 20-day moving average above their 50-day moving average.

This week's notable developments consist of the continued deterioration in the Energy sector, a bit of a slide in Tech, an improvement in Financials and Consumer Staples and, most perplexing (to me, at least), a significant advance in the technical situation in the Consumer Discretionary sector.

In summary --

The last couple of weeks have provided economics reports that zigged and zagged all over the place. First, it seemed like manufacturing was doing well based on exports. Now it looks like a strengthening dollar and weakening global economy may start to tone down the optimism over manufacturing. On the other hand, that strengthening dollar combined with falling commodity prices is expected to make the life of the U.S. consumer somewhat easier.

This week's reports were dominated by employment and unemployment. The news was clearly bad and suddenly, the consumer is encountering a new headwind. Falling prices don't help much if you've lost your job. The other negative was continuing weakness in Technology. With Corning (GLW) warning, it begins to look like consumer electronics may not be the safe haven many investors thought. Of course, the recent durable goods report gave some hints that that would be the case.

Finally, we come to the Financials. After helping take the market down earlier in the week, the sector helped the market recover some of its losses. In my opinion, the optimism was overdone with regard to KKR and Blackstone picking the meat off the bones of Lehman Bros. Why that should be a catalyst for a rally I can't imagine.

As mentioned above, the question is how the market deals with the government's involvement in Fannie and Freddie. To me, it seems that this action might help the real estate market avoid further serious deterioration but it will not do much to work through the overhang of excess inventory in the residential market. I would be surprised if it did much to encourage banks to lower mortgage interest rates. In addition, I don't see how it would help prop up home prices or reduce the rate of foreclosures. Primarily, it seems like a financial maneuver to ensure the capital structure of the these GSE's is adequate from an accounting standpoint - important but not necessarily a sign real estate has recovered and banks have no more problems. Interestingly, it does seem that each time the Dow or the S&P 500 gets down to around the current level, the Fed or the Treasury steps in and does something big. Are those conspiracy theories correct about the government always being ready to save their buddies on Wall Street?

So, will investors embrace a pessimistic outlook based on recent economic reports or will they decide the coast is clear and bid up stocks? As I write this Sunday night, Asian stocks are rallying and S&P 500 futures are up over 2%. The apparent feeling is that some uncertainty has been removed and perhaps things won't get any worse. In a few days, after the euphoria wears off, it will be interesting to see if the markets in general and the financials in particular are still so positive.

Saturday, September 6, 2008

This post is to announce that the latest list of free stock alerts is up and available at Alert HQ. Each week we scan over 7200 stocks and ETFs looking for fresh BUY and SELL signals. We apply a combination of proprietary and standard technical analysis techniques to identify those stocks that are beginning to move.

And plenty of stocks sure moved this week! Unfortunately, the move was mostly downhill. Volume picked up this week and economic news was not comforting to the bulls. Retailers reported lackluster same store sales. Employment was down again and the unemployment rate jumped to 6.1%, surprising most analysts and economists. Talk of hedge funds getting shaky due to bad commodity bets didn't help the atmosphere on Wall St either. It was no surprise to see the major averages turn in losses ranging from 2.8% to 4.7%

Against this backdrop, Alert HQ still managed to find some BUY signals: 10 based on daily data and 15 based on weekly data. In an indication of how the pendulum is swinging, though, SELL signals by far outnumbered BUY signals. This we week we have 35 SELL signals based on daily data and 33 based on weekly data.

Stop by Alert HQ and download your free lists. The lists based on weekly data show those stocks that have exhibited some good follow-through after a recent trend reversal. If you want to be early in identifying the newest trend reversals, the lists based on daily data are for you. No matter which preference you have, there are bound to be a few stocks you will want to add to your watch list.

Thursday, September 4, 2008

In case you haven't noticed, the last couple of days in the market have caused some serious chart damage. As recently as last week, bloggers and analysts were suggesting that the bottom was in and major averages were in rally mode.

Looking at the charts after today's action, the question might more accurately be: how low will we go? Take a look at the following chart of the S&P 500. The index failed to make a serious push above its 50-day moving average. All of a sudden, it has fallen, or more accurately plunged, below the lows of January and March. Those lows now become serious resistance levels. It's no stretch of the imagination to think we'll soon be down in the area of the July lows or worse.

The chart of the Dow Industrials is very similar to that of that of the S&P 500 so we won't present it here.

Whereas we recently wondered whether there was a "stealth rally" playing out on the NASDAQ, it is now clear that there wasn't. The chart below shows the situation.

In the case of the NASDAQ, the index pushed above its 50-day moving average but essentially failed at the 200-day MA. In concert with the other major averages, the NASDAQ has also plunged and is now in the vicinity of its July low.

Are there any signs of life left in this market? In the following chart, we can see that the Russell 2000 has also plunged but as of the close today it remains right at its 200-day moving average. After the last few days of bearishness, this chart is about as good as it gets.

In summary --

The charts are a picture of sudden and severe bearishness. All of the downward moves illustrated above took place on increasing volume. Whereas lack of volume was an issue in August, in September it seems to be indicating an increasing and pervasive pessimism on the part of investors.

What's next? Friday's employment report will be watched closely. With the August results for non-farm payrolls included, the report could push the market further off the cliff if the numbers come in below what are already low expectations.

Wednesday, September 3, 2008

As if there wasn't enough bad news circulating around NAND chip pricing, we have the following two items of note:

ThinkPanmure analyst Vijay Rakesh released a research note today. He indicates NAND spot pricing for 8Gb and 16Gb chips, among the most common types, are down more than 35% for the quarter so far. He specifically mentions SanDisk (SNDK) and the prospect that the company's margins may be squeezed into negative territory. To add insult to injury, he also points to rising inventory levels at SanDisk and other OEMs.

As if there wasn't already a glut of NAND supply available in the market, Hynix Semiconductor just announced the grand opening of its new NAND fab in Korea. Samsung, Toshiba (a SanDisk partner) and the Intel-Micron joint venture have also been ramping up new NAND fabs. Whereas the aforementioned suppliers seem to be showing some restraint in terms of flooding the market with product, it is not known what Hynix plans to do. As the third largest NAND supplier, Hynix has the ability drive prices even lower. Some in the industry fear exactly that and worry that NAND pricing will not see a recovery until the second half of 2009.

In summary, this appears to be a good time to stay away from any stocks whose core business is focused on manufacturing or supplying NAND memory chips. For U.S. investors, that primarily means the downtrodden shares of SanDisk.

Tuesday, September 2, 2008

For those of you have downloaded the Alert HQ BUY and SELL signals recently, you may have noticed that Sanmina-SCI Corporation (SANM) was on the alert list based on weekly data back on August 16 and again this past weekend

I have been eyeing this stock since it popped up on the list the first time. It had a beaten down share price whose recent rally generated the TradeRadar BUY signal. Apparently, many other investors are also taking notice and buying with enthusiasm. It has attracted the attention of Barron's Tech Trader Daily blog. Writer Eric Savitz had the following to say (I include the entire post as it is rather brief):

"There sure are a lot of people piling into Sanmina-SCI (SANM) shares. But there’s still no obvious reason for the move.

A I noted last week, the contract electronics manufacturer’s shares have been on an absolute tear.

To review: On July 14, the stock his a 14-year low at $1.07, and has been climbing relentlessly ever since. The initial spur for the stock was the company’s July 15 announcement that June quarter results were ahead of expectations; the actual results were reporting a week later, along with a plan for a reverse stock split. (Somewhere between 1-for-3 and 1-for-10, the company said.)

Since then, it has been off to the races. Today, the stock is up 20 cents, or 8.5%, to $2.55. In the last four days alone, the stock is up 25%. Since its bottom in July, the shares have gained 138%. One commenter on the previous post theorized that that the company might be a target for rival Flextronics (FLEX), which today happens to be off 25 cents, or 2.8%, to $8.67. That seems like a reasonable explanation for the move; whether anything is actually going on I have no idea."

The rapid ascent of SANM is clearly visible in the following chart. Note also the cross-over of the 20-day moving average over the 50-day moving average, typically a very bullish development.

With a puny Price/Sales ratio of 0.12 and PEG ratio of 0.65, the company is sporting numbers like a value stock, not a tech stock. Despite a closing price today of only $2.62, the company is no micro-cap; its market capitalization is $1.39B. The company is now free cash flow positive. It is also nearing the end of a restructuring phase and embarking on increasing capacity in India.

The recent rally leaves SANM clearly in over-bought territory but the company would be pretty tempting on a pull-back.

Monday, September 1, 2008

This past week the major averages for the most part turned in poor performances. The S&P 500 and the Dow both lost 0.7% and the NASDAQ lost a full 2%. As it turns out, that was not the whole story. There was actually some decent action in the small and mid-cap arenas. The Russell 2000 was up 0.3% and the S&P Midcap 400 Index was up 0.1%.

Our Alert HQ process bears this out. Each week we scan over 7200 stocks and ETFs and record their technical characteristics. Rather than seeing a continuation of the previous week’s downturn, we actually saw a bit of an uptick.

The following chart based on daily data summarizes the state of our technical indicators.

Moving Average Analysis –

All the moving average indicators moved up in unison this week. This means that the number of stocks above their 20-day moving average increased, the number of stocks above their 50-day moving average increased and the number of stocks whose 20-day MA is above their 50-day MA also increased. The increases were not large but, significantly, they show the underlying strength still apparent in the recent market rally.

Trending Analysis and Buying Pressure --

We use Aroon analysis to identify stocks exhibiting strong trends. The good news for the bulls is that the number of stocks in strong down-trends decreased. Unfortunately, the number of stocks in strong up-trends showed a even more of a decrease.

Our Chaikin Money Flow analysis shows a small increase in the number of stocks exhibiting strong buying pressure and a corresponding decrease in the number of stocks exhibiting strong selling pressure.

In the chart below based on weekly data, we see the same kinds of moves only somewhat more subdued.

S&P 500 Sector Analysis --

Below we present our sector analysis for the S&P 500. We have looked at three characteristics:

Percentage of stocks in a sector whose Aroon analysis indicates they are in an UP trend

Percentage of stocks in a sector whose DMI analysis indicates they are in an UP trend

Percentage of stocks in a sector that are trading with their 20-day moving average above their 50-day moving average.

There hasn't been too much change from last week's sector analysis post. We do see some small improvement in the Energy sector. Meanwhile, Health Care, Consumer Discretionary and Technology sectors all gave up some ground.

In summary --

Our Alert HQ data on moving averages and trending generally shows a market that is tentatively bouncing back from the previous week's decline. It shows that the upward bias in the current market trend remains intact despite the drooping numbers turned in by some of the major averages.

Our S&P 500 sector analysis shows some weakness from the previous week but does not indicate a market particularly over-bought or over-sold. It is a portrait of a market that is muddling along.

The fireworks last week were in large part due to market reactions to the economic reports that were released, rising on better than expected GDP and durable goods numbers (read our take on durable goods) and falling on worse than expected personal income and PCE inflation reports.

This coming week the markets will have plenty more opportunities to bounce around based on economic reports. The week's busy calendar includes construction spending, ISM index, auto and truck sales, factory orders, ADP employment, initial claims, Non-Farm Payrolls, ISM Services and the unemployment rate.

With many institutional traders returning from vacation, we can also expect to see volume begin to pick up. After hearing various pundits offering that recent low volume indicates a market trading without conviction, the coming week should give us a good read on whether the strength we have discussed above is just temporary or for real. This should be an interesting week, indeed.

Disclaimer: This site may include market analysis. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.

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